OPPORTUNITY RECOGNITION Margin? Dr. Mark T. Schenkel

Is there a MARGIN in your idea? Profit margin = ? The price we can charge for making something or providing a service less the cost of making the product or providing the service. ( ~ ) = P - C

Why care about MARGIN? Market Issues Stronger Opportunity Weaker Opportunity NeedIdentifiedUnclear Customers Reachable, receptive Unreachable, established loyalties Payback to user/cust. Less than 1 year Three years or more Value add potential HighLow Likely product life Long; beyond investment + profit Short; less than investment + profit Industry structure Emerging / disorg’d Highly concentrated Potential market size $100MM in sales ? or < $10MM Market growth rate 30-50% or more Contracting or < 10% Gross margins 40-50%; sustainable < 20%; volatile Mkt share atttainable 20% or more; leader < 5%

Why care about MARGIN? Economic / Harvest Issues Stronger Opportunity Weaker Opportunity Profit after tax 10-15% or more; durable Less than 5%; fragile Time to break even Time to positive cash flow Under 2 years More than 3 years ROI potential 25% or more per year Less than 25% / year Value High strategic value Low strategic value Capital requirements Low to moderate; fundable Very high; unfundable Exit mechanism Present or envisioned harvest options Undefined; illiquid investment

Economic Logic of a Venture Idea Operating Leverage (high/medium/low) Contribution Margin (high/medium/low) Revenue Driver Flexibility (high/medium/low) Volumes (high/medium/low)

Determining price (what we can charge?) If product or service exists in your market or in another market, see what is charged by others If product or service exists in your market or in another market, see what is charged by others Try to find out all that is included in the price (additional service, warranty, installation, etc.) Try to find out all that is included in the price (additional service, warranty, installation, etc.) Don’t automatically assume you will have to charge much less than current prices Don’t automatically assume you will have to charge much less than current prices If a relatively new product/service, ask a few potential customers what they would be willing to pay (don’t give them choices, as they will always pick the lowest) If a relatively new product/service, ask a few potential customers what they would be willing to pay (don’t give them choices, as they will always pick the lowest)

Determining what it will cost (Direct Costs) Materials: What will it take to make our product (not applicable for a service business) Materials: What will it take to make our product (not applicable for a service business) Labor: Labor: How much time will it take to make the product or provide the service? How much time will it take to make the product or provide the service? How much will I have to pay someone to do the work? (Add in at least 15% to base pay for taxes and benefits) How much will I have to pay someone to do the work? (Add in at least 15% to base pay for taxes and benefits)

Other direct costs (examples): Travel to provide a service Travel to provide a service Direct supervisors Direct supervisors Utilities Utilities Taxes Taxes Equipment Repairs Equipment Repairs Rent Rent

Gross Profit Margin is the difference of Price & Direct Cost Gross profit margin must be enough to cover all other costs (e.g., space rental, phones, insurance, etc.) and meet your income needs. Rules of thumb: If less than 20% gross profit (Gross profit/Price), may want to rethink idea or go on to next one If less than 20% gross profit (Gross profit/Price), may want to rethink idea or go on to next one If 20-50% gross profit, idea has possible merit If 20-50% gross profit, idea has possible merit If over 50%, idea shows real promise, but don’t skip the other steps! If over 50%, idea shows real promise, but don’t skip the other steps!